Omnibus Budget Reconciliation Act of 1993

From Wikipedia, the free encyclopedia

The Omnibus Budget Reconciliation Act of 1993 (or OBRA-93 Pub.L. 103-66, August 10, 1993, 107 Stat. 312) was passed by the 103rd United States Congress and signed into law by President Bill Clinton. It has also been referred to as the Deficit Reduction Act of 1993. Part XIII, which dealt with taxes, is also called the Revenue Reconciliation Act of 1993.

1 Specifics
2 Alternatives
3 Vote
4 Republican Warnings
5 Theory
6 External links

[edit] Specifics

It created 36 percent and 39.6 rates for individuals.
It created a 35 percent rate for corporations.
The cap on Medicare taxes was repealed.
Transportation fuels taxes were hiked by 4.3 cents per gallon.
The taxable portion of Social Security benefits was raised.
The phase-out of the personal exemption and limit on itemized deductions were permanently extended.

[edit] Alternatives

Some alternatives to the bill included a proposal by Senator David Boren (D-OK), which among other things would have kept much of the tax increase on upper-income payers but would have eliminated all energy tax increases while also scaling back the Earned Income Tax Credit. It was endorsed by Bill Cohen (R-ME), Bennet Johnston (D-LA), and John Danforth (R-MO). Boren's proposal never passed committee.

Another proposal was offered in the House by John Kasich (R-OH). He sponsored an amendment that would have reduced the deficit by cutting $355 billion in spending with $129 billion of the cuts coming from entitlement programs (the actual bill cut entitlement spending by only $42 billion). The amendment would have eliminated any tax increases. The amendment failed by a 138-295 vote with many Republicans voting against the amendment and only six Democrats voting in favor of the amendment.

[edit] Vote

Ultimately every Republican in Congress voted against the bill, as did a number of Democrats. Vice-President Al Gore broke a tie in the Senate on both the actual bill and the conference report. In the House the bill passed by only one vote, 218-216. President Clinton signed the bill on August 10, 1993.

[edit] Republican Warnings

The entire bill was very controversial. Many Republicans warned that many of the bills provisions would result in economic catastrophe and that deficit would actually increase. The recently elected President Clinton was criticized by many for what was perceived as a reversal of his campaign pledge to cut middle class taxes although in actuality taxes increased on only the top 2% of taxpayers. Many Americans initially were supportive of changes in the tax code to help the economy and lower the deficit (according to public opinion polls taken at the time). Nonetheless, by the mid-term elections of 1994, many American voters were galvanized by the Republican charge that the Democratic Party had raised their taxes, though Republican warnings of a recession never materialized.

[edit] Theory

The bill, at the time, was based on unproved economic theory. Since the Reagan administration, the American public was more receptive to the type of neoliberal economic policies pursued during the 1980s. The theory behind the bill was that federal budget deficits were more critical to economic health than either the New Deal liberals or Reagan-era conservatives wanted to admit. Both groups dismissed the importance of the federal budget deficit.

The bill, which both raised taxes and cut government spending, has been credited as the major cause behind the deficit reduction and eventual surpluses during the 1990s, by sources such as the non-partisan Congressional Budget Office. [1] The theory holds that federal budget deficits increase both inflation and interest rates. These two phenomena are widely known to cause economic stagnation. Indeed, when inflation increases, often the Federal Reserve will raise interest rates to contain the inflation.

The U.S. government pays for its debt by issuing additional debt instruments (such as Treasury Bonds and Treasury Notes). As U.S. government debt instruments are one of the safest investments in the world, they pay some of the lowest interest in the world. This causes the rate charged on federal bonds to act as a floor. This is because most other debt instruments are more risky (it is more likely that other issuers will default on their bonds than it is likely that the U.S. government will default on its bonds, and so those other issuers must pay higher interest rates to compensate for the higher risk). As more U.S. government debt is issued, there is an increasing demand for world capital to pay for these instruments. As the supply of these instruments increase, the interest rates paid by the U.S. government must increase to attract additional investors. As U.S. debt becomes more costly to carry, debt around the world also becomes more costly. This increase in worldwide interest rates causes it to be more expensive to operate businesses. This suppresses economic growth. It also causes companies to charge more for their products and services to pay for the more expensive debt. This causes inflation. The process is called crowding out.